Benefits of Build-to-Core Real Estate Investing

For many investors, 'Build-to-Core' has a compelling strategy, especially in markets where core assets are scarce or highly priced. This approach involves developing new properties (build) with the intention of holding them as core assets once they are stabilized. In recent years, investors have been using the term "Build-For-Rent" (BFR) which has become synonymous with single family communities for rent. However, the 'Build-to-Core' strategy which is the basis of BFR, has been around for decades.

Defining Build-to-Core Strategy

Build-to-Core refers to the process of constructing new real estate projects with the end goal of creating income-generating core properties. Unlike typical development projects aimed at selling upon completion, Build-to-Core focuses on retaining ownership of the developed asset, turning it into a stable, high-quality investment product.

Benefit #1: High Yield and Appreciation

Build-to-core shines in achieving both growth and income – the twin pillars of real estate investing. By engaging in ground-up development, investors create substantial equity value. Typically, in a project leveraged at 65%, there's an expectation to double equity within the first four to five years, alongside building a cash-flowing asset. Although the initial years might see negative cash flow due to construction and absence of revenue, by year three, these properties often start yielding significant returns, stabilizing financially by the fourth year.

Benefit #2: Entering Booming Markets on Better Terms

In hot real estate markets, where existing properties command prices above their replacement costs, build-to-core offers a strategic entry point. For instance, in markets like Miami or Nashville, new developments can be undertaken at a cost substantially lower than purchasing existing units. This lower entry cost basis not only increases potential profitability but also offers a strategic edge in competitive markets.

Benefit #3: Downside Protection

One of the inherent risks in real estate is market volatility. Build-to-core provides a cushion against such uncertainties. For example, if a project worth $70 million at completion is built for $60 million, there exists a $10 million cushion, safeguarding the initial investment against market downturns. This protective buffer is a significant advantage over purchasing stabilized properties, where market downturns can directly erode invested capital.

Benefit #4: Tax Efficiency

Tax considerations are critical in investment decisions. Build-to-core offers notable tax advantages, particularly in the context of capital gains tax. The strategy leverages depreciation benefits and the opportunity for tax-free refinancing, contrasting sharply with the tax liabilities incurred when selling a developed project. This aspect becomes increasingly critical in environments where capital gains taxes are high or expected to rise.

Benefit #5: Reducing Cash Drag

In real estate investing, cash drag – the period when capital lies idle – can significantly impact overall returns. Build-to-core minimizes this by maintaining continuous investment. In contrast to a model where a developed property is sold and proceeds lie unused until the next investment opportunity, build-to-core keeps the capital actively deployed, enhancing long-term returns.

Conclusion

The build-to-core strategy offers a robust blend of high yields, market entry advantages, downside protection, and tax efficiency. It addresses the core objectives of real estate investing while providing strategic advantages in risk management. For investors seeking a balanced approach that combines the dynamism of development with the stability of long-term core assets, build-to-core emerges as a strategy well-suited to the challenges of today's real estate market.

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